Treasury Prices Fall as Auction Looms

May 7, 2014

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Treasury prices fell Wednesday
as investors brushed off a series of discouraging economic items and focused on
an impending U.S. government debt auction.

In early New York trading,
benchmark 10-year notes lost 3/32 in price to yield 2.608%, according to
Tradeweb. The 30-year bond declined 8/32 to yield 3.394%, while two-year notes
edged a tad lower to yield 0.431%. Bond yields rise when prices fall.

Those losses came despite
general weakness in overseas stock markets and a string of disappointing data
reports out overnight, including a slip in China's service activity and
unexpected drop in Germany's factory orders. U.S. productivity in the first
quarter reported Wednesday morning showed a larger-than-expected decline.

With data largely mixed
over the past few weeks, the Treasurys market has been confined to a tight
range. Investors are unwilling to make bold moves until there is a clearer
picture on the U.S. economy and what the Federal Reserve will do next. The
10-year yield has been locked between 2.56% and 2.81% since early February.

The difficulty for bond
investors these days is that while there are near-term risks—such a downturn in
the recovery or an escalation of tensions in Ukraine that support haven
Treasurys—anyone buying at today's prices risks losses if the anticipated pickup
in economic growth happens later this year. Many bond analysts expect the
10-year yield to end the year well above 3%.